“Blacks swans” and “gray rhinos” represent two very different but dangerous threats to the global economy and investors.
The former, popularized by Nassim Nicholas Taleb in his book, “The Black Swan,” refers to events that are highly improbable but highly consequential, while the latter are out in the open for the world to see but are nevertheless ignored until it’s too late.
Earlier this week, Chinese President Xi Jinping warned Communist Party officials that both species pose a danger to the country, rattling global financial markets and contributing to a selloff that saw the S&P 500 SPX, -0.44% and Dow Jones Industrial Average DJIA, -0.62% end sharply lower on Tuesday. Xi’s comments followed economic data showing that China’s economy had its weakest expansion since 1990 in 2018, underlining worries about global economic growth.
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MarketWatch spoke to Michele Wucker, who coined the term gray rhino and is the author of ‘The Gray Rhino: How to Recognize and Act on the Obvious Dangers We Ignore’, about why the concept is so important.
MarketWatch: What is the gray rhino concept?
Michele Wucker: The gray rhino is a metaphor designed to help us to pay fresh attention to what’s obvious and ideally to create the kind of emotional connection that people had with [Nassim Nicholas Taleb’s] black swan. The black swan did a great job in getting people to realize that they couldn’t predict everything but it has been misused and people have used it as a cop-out. ‘Oh, nobody saw it coming!’
The gray rhino is more dynamic. It’s a metaphor for missing the big, obvious thing that’s coming at you. And the important part is that it gives you a choice. Either you get trampled or you get out of the way, or you hop on the back of the rhino and use the crisis as an opportunity.
MarketWatch: What prompted you to come up with it?
Wucker: The immediate trigger was right after Greece and its creditors came to an agreement in early 2012. It reminded me of Argentina in 2001 when its crisis was approaching. I was the Latin America bureau chief for International Financing Review at the time and I wrote about a proposal from some very smart people on Wall Street, saying “debt is going up, GDP is going down, Argentina needs to restructure sooner rather than later.” In response, a bunch of bankers called me and said “we think so too, but we can’t say it in public.” And we know how it ended: Argentina wanted to save face, bankers wanted to keep their underwriting fees, and Argentina went under.
I thought of that when Greece was falling apart. So I wrote a paper for the New America Foundation called “Chronicle of a Debt Foretold,” saying that Greece needed to learn from Argentina’s mistakes, get it back together and that the creditors needed to restructure.
But I realize that not everyone geeks out on sovereign credit risk like me, so I wanted to create a more accessible metaphor and more accessible examples. Climate change keeps coming up over and over and over again. An example where leaders did see something coming and acted on it, is Deng Xiapong’s economic reforms in China in the late 70s, which opened China up to foreign investment.
But really, it has personal applications as well. The concept is very flexible. It started with finance, but it’s applicable from corporate strategy to going to the doctor with an obvious ailment.
MarketWatch: What gray rhinos do you see in China, specifically?
Wucker: The biggest one, globally and for China specifically, are the unintended consequences of the very loose monetary policy of the last 10 years and the way that has created asset bubbles all over the place. China has actually been much more proactive about dealing with these than the U.S.
In 2017, after a big five-year policy planning conference, during which the concept came up repeatedly, the People’s Daily wrote a big editorial warning of gray rhinos in China. It defined them as general financial risk, but specifically shadow banking, unexpected market volatility, high debt levels, real estate, and new financial products that weren’t sufficiently regulated. The markets rightly saw this as an indicator that regulators would start cracking down on financial risk and risky stocks fell by 5% in a single day on the back of that.
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I’ve been impressed with the way China has taken a very surgical approach to some of the asset bubble questions, to real estate, even to reserve requirements. But China’s toolbox is also much larger [than that of the U.S.].
For the most part China does seem to be aware of its gray rhinos. The People’s Bank of China came out with a report in November, warning of gray rhinos in 2019. And Chinese authorities used it in all kinds of context actually: urban safety, money markets, peer-to-peer lending platforms and wealth management companies promising that certain investments are less risky than they really are.
MarketWatch: What other gray rhinos do you see in the world and which one is the most dangerous?
Wucker: I think the biggest one — and it’s very closely intertwined with the global economy — is the increasing wealth inequality and the way that impacts the social and political environment. A lot of people ask me if President Donald Trump is a gray rhino. Yes! But behind him, there are a whole bunch of other ones. And that’s about social dynamics.
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We’re in a very dangerous place where we see increasing control of wealth and power by the people who already have both. It’s very much a haves versus have-nots and us versus them world. People have been losing their sense that they can do anything to change things. European countries are seeing similar dynamics, where trust in leaders and that the future will be better is shaken. And that is so closely intertwined with things like monetary policy, or the way the 2008 crisis was handled.
So when you look at one gray rhino, you really have to look at all of then. And I love that the zoologically correct term for a group of rhinoceros is a crash. A crash of rhinos.
MarketWatch: Why do you think people often don’t react to gray rhinos?
Wucker: There are psychological reasons, perverse incentives in the system, human biases, we are programed to pay more attention to information that we like than information that we don’t like. It depends a lot on the groups that are around us.
Groups that are very homogenous are less likely to engage in constructive debate. So much depends on decision-making structures.
And then there are big structural issues that can differ from country to country. In the U.S. and in much of the West there is a big bias toward short-term decision-making and kicking the can down the road. We tend to make heroes out of people who clean up messes, but we don’t hold those accountable who let them happen in the first place and that needs to change.
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